Currency fluctuations impact everything from fashion’s supply chains and financial reports to how likely, and where, a customer is most likely to spend on that pricey designer handbag. Here, a rundown of how the major currencies are expected to trend this year:
A Steadier Yuan
The Chinese yuan is one of the currencies of most concern to big luxury brands: After all, Chinese consumers remain responsible for around a third — and rising — of the world’s spending on luxury brands, according to analysts at consultancy Bain & Company.
In the middle of last year, faced with President Donald Trump’s penalizing tariffs on Chinese-made goods, the Chinese government devalued the yuan in order to prevent their products from becoming less competitive. Luxury companies scrambled to compensate.
This year, U.S.-China trade tensions are not going away, but there is unlikely to be another big devaluation of the yuan, according to Ed Moya, senior market analyst for foreign exchange company and trader Oanda. “The U.S.-China trade war is unlikely to intensify like it did this past summer,” he said. “The trade front should be mostly positive or hold since the Chinese do not want to see their domestic growth drop below 6 percent and President Trump wants a strong economy going into the 2020 election.”
Some political pundits agree that, facing re-election, Trump will want a less antipathetic approach to this major Asian trading partner. Several end-of-year reports have also come out, damning the tariffs for causing slowdowns in U.S. manufacturing and job creation. But others say that Trump may just keep playing to his conservative constituents and keep up pressure on China.
Recent events support the former theory, after the White House said it would pull back on some of the Chinese tariffs, with a partial agreement slated to be signed Jan. 15. But optimism was quickly tempered when it became clear that only around 11 percent of the $80.5 billion worth of tariffs was being removed.
Increasingly Unattractive Yen
During the summer of 2019, the Japanese yen rose fast against the U.S. dollar — too fast for some brands, including Shiseido. Foreign exchange experts say that because the yen is seen as a “safe haven” currency in tumultuous times, its ascent mostly had to do with U.S.-China trade tensions. Over the past few years, Japan, one of the world’s three biggest markets for luxury consumption, has come out of a long-running recession and consumer demand has been buoyant (particularly ahead of a recent October 2019 sales tax hike). However, given the yen’s rise, and the fact that it makes Japanese exports more expensive — they fell by around 9 percent last October—- there are now concerns that Japan faces a mild slowdown this year. The yen’s fortunes in 2020 will depend on the local government’s reaction to this, and whether relations between the U.S. and China improve. If they do, and if other uncertainties — such as Brexit — are resolved, the yen will no longer look as attractive, which rules out further meteoric rises.
Volatile British Pound
Even though the results of the December election in Britain mean that the U.K.’s exit from the European Union is now all but inevitable, the machinations — read, trade negotiations — around that departure are likely to continue all year. This means the British pound will remain volatile.
“Brexit will remain a headache but the light at the end of the tunnel is there for the British pound,” Oanda’s Moya said, noting that sterling could actually gain this year after a run of steady losses. Meanwhile, other analysts have pointed out that British Prime Minister Boris Johnson appears set on keeping his promise to Brexit-friendly voters and will insist on a fast withdrawal from the EU rather than an advantageous one. If that happens, this could put pressure on the pound again and the yo-yo effect, already seen in late December, will continue.
There are forecasts that American spending and growth will flatten this year and most analysts — from the likes of Deutsche Bank, Goldman Sachs and JP Morgan — have said that, as a result, the U.S. dollar is likely to fall moderately against the euro, and most likely early on in 2020. The fall will depend on how much global markets grow comparatively as well as U.S.-China trade tensions. That could be good news for companies that have blamed the strong dollar for a lack of shopper-tourists and the resulting retail slump in the recent past.
A minority of analysts believe the dollar will remain strong and possibly even get stronger because it’s seen as a safe bet. Whatever happens, most indicators suggest that the process will be a gradual one.
An Appreciating Euro
Most Forex analysts say the euro is likely to appreciate against the dollar this year by between 4 and 6 percent. Last year, the euro was also predicted to gain but thanks to various issues — such as Brexit, global trade tensions and a more restrained economic outlook in countries like Germany — it did not. However in the coming 12 months a return to trade stability, a rebound in manufacturing and stronger European consumption should all equal positives for the euro zone, experts say.
Foreign exchange fluctuations impact perceptions of a company’s performance and in the recent past, Europe-based luxury brands that report their financials in euros have looked better because their currency was weaker; this in turn impacted share prices and investor sentiment. However a stronger euro should not worry Italian and French luxury brands that benefited from a weaker currency in 2015. As Moya pointed out, “a stronger European economy will protect luxury brands’ profits even if the euro appreciates 5 percent next year to the dollar.”
Brexit is still a factor, Moya said, but that’s unlikely to weigh on the euro again until later on in the year, and only if confidence in the U.K.’s Johnson government is lost.